China's high-stakes race for private-equity 'crown jewel'

Competition among PE firms and between major Chinese cities intensifies

By

ChenHuiying

ZhengHai

BEIJING (Caixin Online) -- Shuttling between Shanghai, Chongqing and Beijing with his top Asian executives in tow, the founder and chief executive officer of U.S.-based private-equity fund TPG searched in earnest for business bases in China.

Competitors in the PE business, such as Blackstone
BX, +2.51%
and Carlyle, had followed paths similar to the trail cut through China recently by TPG chief James Coulter and his team of executives.

And wherever PE firms went, city officials opened their arms. Mayors shook hands with visiting fund managers scoping for office space, and then offered them tax breaks and other incentives. Bringing a PE firm to town would mean jobs, prestige and access to foreign investment funds for local projects.

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Chongqing officials smiled August 24 after Coulter ended his road trip and picked the city for a new headquarters for its 5 billion yuan ($740 million) Western China Growth Fund. It's slated to be Chongqing's first PE fund launched by a foreign company.

Shanghai officials scored as well: Just a day before the Chongqing announcement, TPG had selected that city for its new TPG China Investment Fund.

TPG manages more than $57 billion in assets, with branches worldwide. So far, it has gone no further than signing letters of intent to open funds in Chongqing and Shanghai. It has yet to launch management companies or begin actual fund-raising.

But the plan to operate two, large yuan-denominated funds simultaneously highlights TPG's ambitions in China -- as well as the intensifying competition among foreign funds and between major cities.

PE "is the crown jewel of the investment industry," declared the mayor of Chongqing, Huang Qifan, at the growth fund's inaugural ceremony.

Coulter said Huang's speech was the best appraisal of the PE industry he'd ever heard from a government official.

Price to pay

Searching for high returns in China, TPG began negotiating with a few cities in China about a year ago. The firm has sought to capitalize on a scramble for investment funds now pitting Beijing, Shanghai, Tianjin and Chongqing.

Cities have been offering PE funds "dowries" that generally include fees for setting up funds, financial assistance and policy support. But not all offers have ended in deals.

A standard offer from many cities is a 10 million yuan "commission" for setting up a fund that has at least 1 billion yuan in registered capital. Competition can push offers higher.

Caixin learned few cities so far have actually made these kinds of payments to newly contracted PEs. And lately, government officials at various department levels have been reviewing the calculations, sometimes with an eye on paying less than initially offered.

"It would be a very large sum if the setup funds are truly paid," explained one local government official. "Financial affairs offices and financial and taxation departments differ in their duties after all, and they have different considerations."

"Furthermore, if a company only injects funds but does not invest, would it be entitled to setup funding?" he asked. "I think this issue is open to question."

Meanwhile, investment firms are keeping close watch on the ways local governments are handling PE deals. Not all signs are positive.

"Regrettably, there have been some worrying signs in recent days," said an official working for an institutional investor. "By attracting so-called international giants, some local governments are pursuing nominal achievements."

"They also give a green light to tax reductions and other policies (while) using local finances and state-owned funds as limited partners to attract foreign management," he said. "In even more extreme cases, some advantageous bargaining positions were given up in negotiations with foreign management to meet contract-signing deadlines imposed by superiors."

These factors suggest that, despite all the hoopla and competitive spirit, the flurry of negotiations between cities and firms have failed to mask a start-up scene that "is not good for the new yuan-denominated fund market in China," the investment official said.

PE support

PE firms have stirred controversy in the United States because their business generally involves high leverage levels and low tax rates. But Chinese officials have displayed controversy-free enthusiasm that impressed PE investors.

The Chongqing government has cut deals with 23 equity investment enterprises that plan to raise more than 20 billion yuan combined. So far, 14 have raised money, and the funding raised in the initial stage is 4.95 billion yuan.

Investments so far have focused on fields such as information technology, equipment manufacturing and medical equipment, with total investment of 2.4 billion yuan.

Chinese cities seeking to emerge as financial-industry centers are also keen on PE. They pin hopes on resolving equity financing issues through the funds.

The Chongqing government is giving full support to the TGP growth fund. And in addition to cutting a deal with the government's Financial Affairs Office, TPG signed a memorandum of understanding with Chongqing Liangjiang New Area Development & Investment Group, a government investor in charge of developing an industrial park with 10 billion yuan in registered capital. Caixin learned the group plans to invest about 500 million yuan as a limited partner in the fund.

Neither Shanghai nor TPG officials have disclosed the type of financial support offered by that city. Lawyers familiar with the deal, however, say the PE firm has started by contacting local private and state-owned enterprises.

Coulter has only said his firm reached a consensus with the Shanghai government, as it did in Chongqing. He also said each of these new city funds will invest in growth enterprises within specific geographical regions. They may, however, invest jointly in large projects, he said.

Coulter added that TPG has retained management rights over each fund, and has absolute control over investment decisions.

TPG teams have kept mum about financing plans. They say they will accept individual investors as limited partners, but they've refused to publicize minimum requirements.

In a related move, TPG welcomed an August 5 decision by Chinese regulators that allows insurance companies to make private equity investments. More firms may follow its example.

"TPG may trigger a wave of foreign giants entering yuan-denominated funds," said an industry insider.

City officials such as Chongqing's Huang say there are many reasons why PE is so popular in Chinese cities.

"PE can provide enterprises with funds, asset restructuring and value-added programs, and services such as business management, technology, resources and consultancy," he said.

The industry source said governments of the four municipalities directly under central government control -- Shanghai, Beijing, Chongqing and Tianjin -- may have gone too far with concession offers.

Nevertheless, global investors are continuing to eye Chinese assets. Rates of return on investments have been high over the past decade among PE funds in China, and many see more investing in the country as a logical move. See this report on Caixin Online.

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